Negotiations Leak: Could Variable iTunes Pricing Be on the Table?

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Negotiations Leak: Could Variable iTunes Pricing Be on the Table?

Steve Jobs wants to extend Apple's lead in online music sales to the mobile market, and the 3-G iPhone expected next month positions them to make the iTunes store available everywhere you have signal. Jobs also wants in on the ringtone and ringback tones business – thoroughly impulse buys which become feasible on the iPhone only if purchasing can be done outside of a hot spot.

Trouble is, he needs some new deals from the record labels to make this happen. The record labels have some demands of their own – chief among them variable pricing. As music licensing negotiations between Apple and the labels continue, the labels hope to trade mobile delivery for variable pricing, according to a New York Times' source, a record label executive.

An Apple spokesperson told Wired.com, "We don't comment on rumors and speculation," but we got a couple of analysts to weigh in on the possibilities.

"All sorts of discussions happen over time as the contracts [between Apple and the labels] expire. All sort of issues get lumped in, and no doubt [OTA downloads are] going to be one of them," Michael Gartenberg, VP and research director of Jupiter Research told Wired.com. "Clearly Apple understands that its devices are dependent on getting content - music, games, movies, ringtones etc., and it's going to work hard to make that happen. Apple's track record with iTunes and the iPod suggests they probably will get the kind of cooperation they need."

Currently iPhone owners can buy iTunes content only when they are ina hot spot. The use of AT&T 3-G makes broadband ubiquitous and thatmakes the OTA ringback and ringback-tone business viable. However,Apple could be forced to cut AT&T in on music sales if it wants topipe music over the company's wireless data networks to iPhone users.

Mobile is "clearly an opportunity Appleis missing," said Lewis Ward, research manager ofmobile consumer services for IDC,via telephone. "And Apple is going to want to do it all themselves, butthese OTA music storefronts have not sold very well. Maybe there'ssecret sauce Apple's thinking about, but the track record [of mobilemusic and ringtone stores that require a credit card rather than charging users via their cellphone bills] has not been impressive to date."

"The real issue is billing," said Ward. "People are much more comfortablewith paying through a carrier [because] you don't have to enter acredit card number or be worried about security.... That puts the carrier in the supply, and the carrier is goingto want their cut, which means the margin for Apple goes lower."

As for the labels, they want iTunes to abandon its policy of selling songs at a flat rate of 99 cents in favor of a demand-basedpricing systemthat would charge more for hot releases and less for other tracks. Thelabels have already tried to pressure Apple by withholding some oftheir music from the DRM-free section of the iTunes store, but thesemobile licensing agreements give them even more negotiating leverage.

Apple already allows HBO to sell videos at various prices throughiTunes; if Jobs wants a bigger piece of the mobile pie, he could soonbe forced to cave to label demands for the same options. And that's notall.

At least one of the majors – UniversalMusic Group – also wants Apple to offer an "unlimited music" iPodthat would allow device owners "a year or two" of subscription-styleaccess to a large catalog in return for paying the labels an upfrontfee with each iPod sold. (Will factory-replaceable batteries be the newDRM?)

Negotiations around these topics have been happening for a few weeks and are ongoing, according to the New York Times. IDC audio analyst Susan Kevorkian told usthat Apple's practice of selling songs at a flat fee has already servedits purpose, which was to show the music buying public how simplebuying online could be.

If that's the case, Jobs could fold on the variable music pricing front to give Apple a bigger percentage ofthe mobile music market.

(As an aside, Apple has a strange ally during these negotiations: Eric Castro, whose recently-launched iPhone file sharing application increased pressure on the labels to license a service for OTA downloads to the iPhone.)